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Friday, January 31, 2014

Bears Wake Up from Hibernation in US Equities

Bears have made progress since last update, having forced the anticipated new low, which is beginning to give the wave structure an impulsive appearance. This was the expectation, since we're following November's preferred count (for those just joining us, the preferred count anticipates that the market is now retracing an extended fifth wave rally), but it's important to have confirmation from the market anyway. We've all seen what happens to traders who form a thesis and then ignore the market's signals (i.e.-- preferring to be "right" over being successful).

We'll start off with the S&P SPDR Trust (SPY), which is an effective proxy for the S&P 500 (SPX). Since last update, SPY has reached the first downside target from January 10, but appears to need at least one more wave down to form a complete impulsive (five-wave) decline. In a way, this is now the "hopeful bull" count... on the NYSE Composite (NYA) chart which follows, I outline a more bearish potential. As I mentioned in the last update, this market has been behaving suspiciously like it's in a crash wave (or "waterfall" if we want to avoid the "c" word), so we need to stay open to that possibility.

The NYA chart notes the more bearish potential and some signals to watch. Notice how NYA broke down from the lower black support line. It's back-tested that line, and not only failed to rally above it, but has consolidated the breakdown by back-testing the trend line twice. That suggests strong selling pressure in that price zone; price consolidation beneath support is generally a bearish signal.

For those following along at home, I've also labeled the subdivisions of the wave structure in more detail (on this chart), to help "show the math" behind the idea that the next wave down is wave (5). I didn't show this level of detail on the SPY chart because when I tried, Stockcharts.com gave me the following message: "You have too many annotations. Try deleting some. Seriously. What is wrong with you?"

Finally, an updated look at the trusty SPX:AGG (essentially: stocks to bonds) ratio chart, whose signals have been dead-on for the past few months.

In conclusion, it appears quite likely that November's preferred count will continue to hold, and that bears are going to effectively confirm an intermediate trend change. If you're a relatively new trader, remember the counter-trend trading is the most difficult type of trading there is. When you trade with the trend, the market will always come back to you eventually, and will thus bail you out of even the worst entries. When you trade against the trend, you have to stay extremely nimble -- your entries and exits must be close to perfect, or the market will leave you high and dry and not look back.

There are, of course, bullish options here; after all, we're always dealing in probabilities, never certainties -- but for the moment, there is nothing in the charts that suggests an intemediate bottom is at hand, though they do hint at the idea that we may be getting close to a short-term rally. Trade safe.

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